Small Cap Value Report (13 Jun 2016) - FITB, WATR, EGS, TRD

Brexit seems to be very much dominating things right now. The opinion polls are showing a late surge for the Out campaign. I've always assumed that the British people are most likely to do what always happens on big issues - if unsure, at the last minute people trot out and vote for the status quo (e.g. AV referendum, Scottish Independence, etc.).

For that reason, personally I've done very little to my portfolio, other than placing a bet on an Out vote succeeding, as a hedge, and also for fun. It's beginning to dawn on me that the amount I might win on that bet would be only a fraction of what might be needed to hedge fully against an Out vote.

My feeling is that an Out vote succeeding would be likely to trigger quite a big, panic spike down in UK listed company shares. I say spike down, because I suspect such a panic fall would be fairly short-lived. It's likely to dawn on investors that actually nothing much will change for a while. It's going to take many years to unpick all our arrangements with the EU, and nobody really knows what the end results will be.

Looking at it from a high level though, it's pretty obvious that trade will continue largely as normal. There might be some trade tariffs in both directions, but as a large net importer, that's actually a boost for the UK economy overall. Remember that UK tariffs on EU goods will help import substitution, so UK producers will become more competitive in their home market.

I imported some goods from Hong Kong last year, and the import tariff was small, and no impediment to my purchase decision whatsoever - either financially or administratively. The freight forwarder just emailed me an invoice, I paid it, and the goods were delivered. Easy peasy. Free trade & globalisation really isn't the panacea that some people seem to think - look at all the manufacturing jobs we've lost. So I don't think we should fear the imposition of tariffs by the EU against Britain. We should enthusiastically reciprocate, and you can bet that German manufacturers will soon be hammering down the doors of the EU to get those tariffs reversed.

Whilst personally I favour an Out vote, as the best thing for our country long term, I'm not under any illusions…

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How exactly are you handing power to anyone (of the Brexiters) with this referendum? What you're doing with Leave is just preserving or enhancing the power of your vote. You can then vote for whoever you want, and perhaps that party will be able to carry forward its manifesto more ambitiously, more rapidly, with fewer checks from abroad. Maybe it'll be the Marxists, maybe the LibDems, maybe the Muslim Brotherhood, who knows. Nigel Farage is irrelevant here. If he comes back in 3 years promising to throw the blacks into the sea, he won't get elected and you'll never be troubled by him ever again.
OTOH if you don't think that you can win an argument against extremists, sign your vote away now.

But Paul if I remember my politics A level from 38 years ago it is the executive (the cabinet) who iniates the significant legislation in the UK and it is rubber stamped if it is important in the eyes of the executive (via the three line whip) by parliament. MP's can imitate legislation via private members bills but if the executive does not want them to become legislation they are not given parliamentary time.

I would hesitate to hold up the uk as an exemplary example of representative democracy in action. House of Lords anyone? (Though I am actually a supporter of an unelected chamber. It brings oversight of legislation from a different perspective.). Especially when the UK is constrained by so many other non EU treaties/agreements signed since 1945 or even before.

I do genuinely believe we are better of with and in the EU than without and out and that it can be changed from within but that will take time. But I know you will disagree with me on that.

Some quick points, partly “quick” because I recognise the futility of a “debate” on a topic that tends to polarise views – I think that most people have already made up their minds and don’t expect to change any by writing this.

1. If you object so much to the supposed “unelected Commission” (who in practice are appointed by the governments, inc our own) then why are you so happy with the House of Lords?

2. When was the last time that the EU personally affected *your day to day life* in a negative manner? Stopped you doing/buying something? Compare that with those positive times. Don’t cheat when answering the question, focus on your personal day to day life!

4. Also, the Swiss trade deal doesn’t extend to financial services hence the Swiss banks have been had to establish UK banks in London which are thus in the EU and can sell to the rest of the EU. These banks will be the first Foreign banks to close if we Brexit (*) and more will follow (* - NB *IF* we follow the Brexit model that Boris and Gove are peddling but see below as they’re lying).

6. Average WTO tariffs are apparently 3%. If UK industry has to cut costs to remain competitive then is that 3% of jobs? What other “cost” would be cut to compensate?

The EU is not perfect but taking everything into account personally I’m a Remainian and have already cast my postal vote accordingly (too late, you can’t change my mind so there’s no point trying). If we Brexit though, I would like to make a prediction and hence get to the point of writing this (see my first sentence) as I’d like to get it down in writing in advance:

If we Brexit then we will join the EEA. It’s the only option that would permit the UK to retain access to the free market for both goods and financial services and the hit to the financial services sector would otherwise be disastrous to the UK. Of course the consequence of joining the EEA will be that we (like Norway, Iceland and Lichtenstein) will have to permit Freedom of Movement and so those who want us to stop immigration will not be happy. Likewise we will need to accept various EU legislation with little say over it (Norway has adopted 21%). And we’ll still have to pay into the EU budget, albeit we will have a saving versus what we pay now. All round everyone will be deeply unhappy because no one will get what they want, not the Leavers, nor the Remainians.

In summary therefore, if we Brexit we will have three years of pain only to then agree a deal with Europe that’s worse than the existing one!

Personally I would give asylum to those who are fleeing danger in their own countries. Before WWII boatloads of Jews were turned away by this country. People didn't want them here. They ended up back in Germany and many of them were gassed. What you are talking about is leaving people to be tortured and killed rather than try and help them.

As for under performers - the under performers I see are mostly British. People who show the initiative, resourcefulness, bravery and toughness to get half way across the world looking for a better life are not usually under performers. The opposite in fact - and it is often their success that makes under performers in the countries they move to resent them.

That is misleading about Switzerland, they don't have more immigrants than the UK, they have more per capita that is true but is changing, they voted in 2014 to limit immigration. In 2015 immigration was down over 9% and emigration of foreigners was up over 6%. Net immigration was 71,495. UK was over 300,000 I believe or over 400,000 if you exclude British emigrants. So thats about 6x the Swiss number.

Well a former Chancellor of the Exchequor disagrees with you. He's written an article today saying that the UK would have a BETTER deal outside of the EU, and explains why, with figures. It's very interesting, and worth a read.

I'm increasingly of the view that Brexit would have minimal impact on physical goods trade. However, I'm more worried about its impact on the City. So I think we might need to put through some quick sweeteners for the financial services sector to preserve as many jobs in the City as can be.

Yes I agree with you re immigration. I very much favour immigration, on a controlled scale.
My own parents gave a home to a Ugandan-Asian refugee in 1972, when I was only 4. He was a young man who joined our family, integrated into British life, went to Uni, and has had a successful life & career in Britain ever since. I had Xmas dinner with him & his sons just 6 months ago!

So my family's experience of immigration has been tremendously positive. The Ugandan-Asians in particular have been a tremendous asset to the UK, as they were the middle class from Uganda, whose own economy collapsed when they left.

The difference now is that the numbers are far too high. Back in the 1970s net immigration was about 50,000 people per year - a number which could be easily assimilated, housed, etc. Today the figure is many times that, and it's swamping housing, education, and other public services and infrastructure. Also the existing population, of all backgrounds, begin to resent migrants when they see their own access to housing, etc, becoming so difficult. As you rightly say, it's often the existing under-achievers who resent the newcomers the most.

It all needs to be managed properly, like it was in the 1970s. The refugees were all checked out then. We had a visit from the local police, who wanted to make sure everything was in order. Apparently they came round twice, and my Mum sent them away with a flea in their ear the second time, stating firmly that everything had already been checked and was perfectly fine!

Our Ugandan experienced some pretty horrible racism at the time, and some of our neighbours made derogatory comments. He quickly picked up the local vernacular - and a forceful Foxtrot Oscar meant they left him alone in future!

This time around, I personally have had overwhelmingly positive interactions with the many Eastern Europeans, working hard in hotels, bars, restaurants, etc.. So personally I want to see immigration continue, but just with better safeguards (to keep out convicted criminals especially), and some control over numbers, which are far too high.

I appreciate we've wandered off topic somewhat today, but it was very slow for company news. Also this EU Referendum is by far the biggest issue of the day, so it's interesting to discuss with the community here.

I had dinner with him and my local MP about three months ago, I've sent you the photo (obligatory!) via twitter.

You present one "former Chancellor of the Exchequor", I raise you two: Gordon Brown and Ken Clark. Gordon because he's left and thus balances my second choice (I hate Gordon to be honest) and Ken because I do genuinely consider him to be the sage of "former Chancellors of the Exchequers" and I love his non-interventionist style. Can you find another "former Chancellor of the Exchequer" on your side because I know that I can re-re-raise to three (Major) if necessary?!?

Clearly we don't agree. There's nothing to be gained by arguing because we're not going to persuade each other in either direction. But equally I am 110% absolutely convinced that voting Brexit will ultimately lead to EEA membership which will ultimately prove in itself to be just as contentious as our existing relationship with the EU and actually materially worse.

Brexit is genuinely a vote for three years of pain followed by a deal that's worse than what we currently have. Come back and tell me what a moron I am in three years from now, I'm sure you'll be able to find me!

There are basically three strands of debates that each voter needs to take a position on before he can make a binary decision "in or out". And consider their relative importance to him.
- the immigration issue
- the sovereignty issue, and
- the economic issue

Personally, the immigration question tells me to vote "out"; the sovereignty question tells me to vote "out", and the economic one tells me to vote "in".

I will throw in one further consideration, which doesn't register on the radar in the UK, but if you speak to the French, Germans and others in Central and Eastern Europe, is fairly significant in their thinking. No more wars like the 1st or the 2nd. A strong EU may not guarantee this but it reduces the risk considerably.

How I am going to vote? Frankly I don't know yet. There are strong pulls in either direction.

Guys -Make a diary note to watch live Phillip Green being grilled by the Commons Select Committee, tomorrow Wednesday at 09:30. Ring side seat for what will prove to be highly entertaining and fascinating. That is if he does turn up as he has threatened to stay put in his £100m superyacht.

- the euro is a failure, in the words of Buffett. "It doesn't appear to work.." If the UK was in the euro, leaving would be a lot more difficult.

- Schengen is a failure, it simply cannot work in it's current form.

- the European Parliament has failed it's poorest countries, Greece in particular. If the USA treated states like Louisiana, like Europe treated Greece there would be absolute uproar in the States.

If there is a vote to Brexit, do you think the UK will Brexit or is just like hitting the "Reset Button" as happened in Greece when they voted in a new government on the basis of getting out of the Euro and then had a Referendum to stay in?

Being a part of Europe is being in an imperfect club, but this one is incapable of reforming and has shown absolutely no intent on getting to grips with the issues.

The economic shock of Brexit would be severe but the economy will recover and MAY be stronger. But the other thing is what will happen to the EU....maybe they will get their act together and reform or maybe it will disintegrate.

After the vote on Brexit, most of the money investors have realised from sales of shares is going to go back into shares, I would have thought?

The alternatives for holding assets may be;

Property - this really is a real bubble currently
Bonds - not at these low interest rates, thank you!
Gold? - maybe for a little while but not a medium-term option in my opinion.
Cash - the worst performing asset class according to a Mr Buffett.

Also, isn't there going to be a hell of a short squeeze at some point? Before last Friday share valuations weren't in bubble territory imo, so they clearly are not there now...soon people will reverse their ftse shorts, won't they?

I'm feeling the pain but I f**ed it up in February and sold a lot when I shouldn't have. I think I'm not going to sell anything and instead sit in the corner of the room, dribbling, for a few months, and see what happens ;0)

A few of the reasons I think it would be completely nuts to vote out.
Economically the medium term pain will be significant. The idea of turning away from our largest customers is just part of it and voting out will be like a slow national suicide.
Investment is already grinding to a halt. The UK can ill afford to lose its financial services sector to Frankfurt. Next to go would be the non UK car manufacturers who fabricate in the UK - currently one of our most successful sources of employment.
The UK economy has done very well in the last 8 years. We have the lowest unemployment since the 70's and close to full employment. We are amongst the fastest growing economies (and that's with the UK IN the EU) not outside.
The idea that because Germany exports cars to us or the French cheese therefore they will do a deal is irrelevant as any deal will have to be with ALL member states or none, that's the nature of the beast and they won't give that to the UK without free movement of people.
We are an ageing population and needs young working, tax paying blood, otherwise the tax burden on our childerns generation will be unsustainable without huge public service cuts. Just what we have had from most recent immigrants (they put in more than they take out). The Poles actually really help boost UK growth and added, along with 400,000 French and 100,000's of other Europeans to the vibrancy of London.
Further on that, I can see our opening our doors to the commonwealth (as suggested by outers), going down a storm. Open doors for West Africa, Bangladesh, India, the Caribbean (most much poorer nations than the East Europeans). That will delight all those UKIP types.
Will we regain more 'control'? Possibly but we will also be faced with fresh boarder issues, be that in Northern Ireland (an open boarder), France (why would they control immigrants in N France if we leave?) and the potential break-up of the UK with Scotland and Wales in favour of staying.
For me the main reason to stay is stability in Europe. Europe is more unstable now, than at anytime since the 2nd World war. The very reason the whole European project was started. If we leave, it might presage the break up of the EU, a long term recession and wild nationalistic swings to the right and left. The far right is close to power in a number of EU states. And if anyone thinks that's a good idea they have not thought it through.
Do I like the way it works. No but be a strong voice and try and change it for the better. Most Northern European countries would welcome it, if done with the right intentions.

So we have a campaign built around appealing to the people impacted by globalisation: the blue collar workers who've lost job security and seen their wages stagnate in real terms, and the patriotic who want to see their country "Great" again, regardless of the reality of their economy's dependence on the global economy.

So am I talking about the Leave campaign - or Donald Trump?

Of course, we laugh in disbelief at the Americans for backing Trump, but where’s the difference? Both Trump and Leave appeal to the disenfranchised who’ve seen their job security destroyed and their wages cut in real terms by unstoppable global effects and the patriotic who refuse to accept the inevitability of globalisation.

Trump says he will make America "Great" again, the Leave campaign says the UK will retake its proper place in the world. Both will ultimately be dependent on the global economy, and the power of trade groups to shape it.

Trump wants to build a real wall to keep immigrants out, the Leave campaign wants to build a metaphorical wall to do the same; but it’s still a wall for all that.

So there’s a slogan to hang your hat on. We’re all Donald Trump now ...

The European Union and the Euro have been around long enough to be recognised as a roaring success for Germany but a long-term disaster for all other participants.

EU “rules” never apply in the face of determined political opposition. The hilariously misnamed “Growth & Stability Pact”, first introduced in 1997, has brought neither growth nor stability. Fifteen of the member states are currently in breach, including Germany, United Kingdom, Spain, France, Italy, Netherlands, and naturally Greece is in that pile too. See: Growth & Stability Pact from the official EU website, but clearly written by somebody not of this world.

When Greece was admitted to the Euro on the back of fantasy economic statistics everybody in the EU knew they were make believe. The political imperative to put two fingers up to those countries that chose not to join the madhouse overrode everything else. The people of Greece now pay and will continue to pay the heavy price. I can’t wait to see the carnage when Poland, Bulgaria, Romania, Slovakia and the rest adopt the Euro. They have no choice; it was one of the conditions of EU admission.

I am very comfortable taking an opposite economic perspective on Brexit from Osborne, Cameron, Blair, Brown, Clarke et al. They are all serial failures.

The argument between Remain and Leave reminds me very much of the argument over should the UK join the Euro:

“The euro has proved to be exactly the job-destroying, recession-creating, undemocratic monster the doubters always warned it would be. This was not the received wisdom on the left at the time, when to suggest that the euro would be supercharged monetarism, Thatcherism with knobs on, was deemed unseemly. People who liked the euro were civilised, supported the arts, went to Tuscany or the Dordogne for their holidays. People who didn't like the euro drove white vans decorated with the flag of St George.Today, it is hard to find even the most fervent euro enthusiasts in the Liberal Democrat party arguing for UK membership of the single currency. Disillusionment with what was once called "the Project" is almost total in the face of grinding austerity, a double-dip recession that has already lasted 18 months and a jobless rate of 12.2% and rising.Imagine for a moment that Nick Clegg, Ken Clarke and Tony Blair had triumphed back in 2003.”From: The Guardian Do not adjust your spectacles.

I trained as an accountant with a Top 5 firm, but that was so boring that I spent too much time in the 1990s being a disco bunny, and busting moves on the dancefloor, and chilling out with mates back at either my house or theirs, and having a lot of fun!Then spent 8 years as FD for a ladieswear retail chain called "Pilot", leaving on great terms in 2002 - having been a key player in growing the business 10 fold. If the truth be told, I partied pretty hard at the weekends too, so bank reconciliations on Monday mornings were more luck than judgement!! But they were always correct.I got bored with that and decided to become a professional small caps investor in 2002. I made millions, but got too cocky, and lost the lot in 2008, due to excessive gearing. A miserable, wilderness period occurred from 2008-2012.Since then, the sun has begun to shine again! I am now utterly briliant again, and immerse myself in small caps, and am a walking encyclopedia on the subject. I love writing a daily report for Stockopedia.com on most weekday mornings, constantly researching daily results & trading updates for small caps. Cheese! more »